Thursday, August 04, 2005

Courts rule Smart exempt from paying local franchise taxes

The Court of Appeals has upheld a lower court decision declaring Smart Communications Inc. exempt from payment of local franchise taxes worth about P312 million.

In a notice of resolution dated June 9, 2005 and received by Smart only recently, the CA 11th division deemed the case "abandoned and dismissed" after no petition for review within the period of extension was filed by the City of Makati and its representatives.

The Court of Appeals early this year gave the City of Makati a 15-day extension or until March 9, 2005 to file a petition for review. However, as of May 30, 2005, no petition has been filed.

Likewise, the Supreme Court made an entry of judgment on April 6, 2005 on its Oct. 13, 2004 decision upholding a CA decision to exempt Smart subsidiary Pilipino Telephone Corp. (Piltel) from paying local franchise taxes to the City of Makati on similar grounds. Last Aug. 3, 2004, the Makati Regional Trial Court (RTC) declared Smart exempt from paying the local franchise taxes charged by the Makati City Miscellaneous Taxes, Fees and Charges Division worth P196.23 million for calendar years 2000 and 2001, and P115.83 million for 1995, 1998 and 1999. These included surcharges and interests.

The City of Makati elevated the case to the appellate court, but no petition for review was filed within the prescribed period.

RTC cited Sec. 9 of Republic Act 7294 or the Smart franchise, which stipulates that Smart should pay a "franchise tax equivalent to three percent of all gross receipts of the business transacted under this franchise... and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof. Provided, that the grantee, its successors or assigns shall continue to be liable for income taxes payable..."

The court added Smart is not covered by Section 137 of the Local Government Code or RA 7160, which states that "notwithstanding any exemption by any law or other special law, the province may impose a tax on businesses enjoying a franchise," and by Section 193, which withdraws tax exemption privileges."

"The franchise of Smart or RA 7294 was enacted only on March 27, 1992 whereas the Local Government Code or RA 7160 was enacted on Sept. 12, 1991 and took effect on Jan. 1, 1992," the court said.

"The revocations and withdrawals of tax exemptions under Section 193 of the LGC clearly refer to those which were previously granted and/ or those presently enjoyed at the time of the enactment of the LGC of 1991 and not with regard to those which were granted after the enactment of the said law," the court added.

On Jan. 19, 2005, Branch 28 of the Iloilo City RTC likewise ruled that Smart is exempt from paying local franchise and business tax worth P764,545.29 for calendar years 1997 to 2001, inclusive of surcharges and penalties.

"Although all exemptions were withdrawn by the Local Government Code of 1991, the exemption of... Smart was restored pursuant to Section 9 of RA 7294... Clearly, RA 7294 is a later law expressive of a later legislative will," the Iloilo court said.